Business Finance Exam 1

joan invests $1500 for 4 years and expects to earn 10.50% per year. what will be the value of her investment in 4 years?

$2.236.35 N= 4 I= 10.50 PV= 1500 compute FV= 2,236.3531

how can stockholders manage/minimize the agency problem?

-align management compensation to the primary goal -sell the company -incur monitoring and bonding costs -have more independent directors on the board -separate the role of the chairman and CEO position -require management to purchase substantial amounts of the companies common stock

What are the three basic ways financial capital is channeled from "Net Savers" to "Productive Project Investors"

-direct transfers to (net savers) from productive project investors (PPI) -indirectly through financial intermediaries (FI's) -investment banks purchase/underwrite securities issued by PPI then sell them to FI's and or Net savers

if a company is not producing enough free cash flow to provide the stockholders to a fair and reasonable return, what does the formula for free cash flow tell management it must do to improve the companies free cash flow performance?

-increase EBIT by increasing sales and improving operating profitability -reduct effective income tax rate, by making investments which reduce taxes -reduce capital expenditures -reduce investment in net operating working capital

why is profit maximization not strong enough to be the primary goal of business financial management?

-it only addresses accounting net income and not free cash flow -accounting net income ignores managing a companies level of riskiness -accounting net income ignores the companies weighted average cost of capital -focusing only on free cash flow would also ignore risk and WACC

what are the basic forms of being incorporated?

-limited partnerships -corporations -S corporations -limited liability companies (LLC)

what are the 6 investment problem structures and which is not being highlighted in chapter 5 but will be discussed in a later chapter?

1. single future value cash flow 2. annuity 3. ordinary perpetuity 4. grown perpetuity 5. unequal multiple future cash flow : limited N 6. unequal multiple future cash flow : unlimited N

calculate AFP market to book ratio. assume the market price of AFP is $23.06 per share and that AFP has 50 million shares outstanding. if the industry average ratio is 1.18x how could AFP performance be interpreted?

1.23x AFP has superior performance

calculate AFP total assets turnover ratio. if the industry average ratio is 1.3x how could AFP performance be interpreted?

1.5x which is superior to the industry average of 1.3x

calculate AFP profit margin for 2016 compared to 2015 and comment on what happened in 2015

3.92% 2016 has inferior performance

calculate AFP days sales outstanding ratio assume there are 265 days in their fiscal year. if the industry average ratio is 36 days how could AFP performance be interpreted?

46 days=average amount of time it takes AFP to collect receivables which is more than industry average of 36 days. AFP has inferior performance

calculate AFP total debt to total capital ratio. if the industry average ratio is 36% how could AFP performance be interpreted?

47.8% AFP has inferior performance

Calculate the current ratio for AFP. If the industry average ratio was 2.85x how could AFP performance be interpreted?

AFP's ratio is larger than the industry average, so AFP is more liquid than the industry average company, which is generally good

define business finance

business finance is the management of money invested in business assets/projects that are expected to product at least a fair return for the owners of the business assets/projects

how can finance be defined by the kinds of professions it equips?

corporate finance, commercial banking, money management, investment banking, consulting

define finance

finance is the management of money invested in assets that are expected to produce at least a fair return for the owner of the assets

what are a few of the benefits of computing financial ratios?

financial ratios help us better understand a companies different kinds of financial performances financial ratios computed for a different time period and different companies permit a comparison analysis to be done irrespective of the different sizes of the company over time or the different sizes of companies being compared.

what formula summarizes what management needs to do in order to achieve the primary goal of business finance?

free cash flow > weighted average cost of capital

what four things are communicated in the cash flow statement?

gross cash flow from operations total investing expenditures, total net funds from financing activities, and net change in the companies balance of cash

what can be the relationship between ethical problems in business and shareholder value?

if a publicly held corporation has management and employees who violate generally accepted standards of ethical behavior then this could lead to common stockholders losing confidence in managements ability to serve their interests and this could lead to a lower demand for the stock and thereby a lower value/price for the stock

what are two basic legal forms of business organization?

incorporated and unincorporated

what is the difference between intrinsic value and market price with respect to the valuation of common stocks?

intrinsic value: and estimate of a stock's theoretical "true" value based on accurate risk and return data market price: the current price being paid in the market for a stock based on perceived but possible incorrect information

what does the phrase "time value of money" (TVOM) mean?

it means we assume excess cash can and will be invested to earn a return over time in the future. it means that excess cash can be invested because there are thousands of investable assets available from which to choose so that in the future $1 today should be worth more than $1

what is free cash flow (FCF) and why is it important?

it represents the amount of net after-tax cash flow available to the business owners which they are "free" to distribute to lenders and to all stockholders without hurting the company

what does the balance sheet communicate?

it shows the historical cost of all assets purchased on a cumulative basic and still in service less any applicable accumulated depreciation for long-term assets (book value), as well as a list of the major categories of liabilities and equity capital used to finance the purchase of those assets.

what are some of the limitations of financial ratios?

ratios use only historical figures from the standard financial statements (book values) and not assets or liabilities based on their market/cash values larger more complex companies have consolidated financial statements which means complete financial statements many not be available for different businesses/business segments seasonality of financial results reported can distort ratios

what are the 4 basic markets for financial assets?

spot markets & future markets money and capital primary and secondary private and public

what does the income statement communicate?

the income statement shows for a designated period of time (one month, quarter, one year...) the total value of all products sold, the cost to the company of those goods/services sold, all other expenses incurred during the designated period, and whether or not the total value of sales was more than, equal to or less than the total amount of expenses (ie:net earnings or net losses)

how can we define "investment" or "investing"

this refers to incurring an expenditure in cash today in order to acquire the opportunity to receive back in the future one or more amounts in the future which are bigger than the original expenditure. the probability of a fair return is 50% to 100% and the probability of a superior return is probably no more than 10%

what is the primary goal of business finance?

to maximize the market value of the shareholders equity investment by working to produce enough free cash flow profitability to at least cover the companies weighted average cost of capital

tom has a contract that will pay him $23,850 in 3 years. he wants to sell this contract today, if a buyer could normally earn 8.75% per year investing his money, what would be the max price this buyer would pay Tom for this contract?

$18,543.88 N=3 I=8.75 FV=23,850 compute PV=18,543.8791

how is finance different from accounting

accounting: recording and reporting accurately according to the financial impact of an entity's historical business transactions finance: investing in assets expecting a fair return in cash value terms in the future plus the original cash value amount invested

What are the advantages and disadvantages of Incorporation?

ad: -lower risk to owners, management and employees -easier to sell the company -easier to obtain external financing disadv: -more complex to form and maintain -subject to corporate income tax code -double taxation

what are advantages/disadvantages of unincorporated businesses?

ad: simple to form, subject to only the individual income tax code disdv: personal assets at risk, harder to finance and sell forms: sole proprietorships and partnerships

what is agency problem and agency costs?

agency problem: when management fails to achieve the primary goal, conflicts between the business owners goals and managements goals agency cost: the various costs of the agency problem